Colder than last year wasn’t quite cold enough for a number ofLDCs reporting first quarter earnings. While temperatures duringthe first three months of the year were down, earnings weren’t ashigh as they could have been had winter weather been more normal.

MidAmerican Energy posted net income of $8 million, down a full70% from first quarter 1998 net income of $27 million, and Scanawas off 42% to $37 million from $64 million. All was not lost inthe LDC arena, however, as a number of companies posted respectablegains in net income. KeySpan was up 24%; Peoples Energy gained 40%;LG&ampE was up 60%, and CILCORP gained a whopping 64%.

“Our earnings met our expectations,” said KeySpan CEO Robert B.Catell. “We had solid performances from our gas-distribution andelectric-service operations. The gas-distribution businesscontributed $0.84 per share, clearly reflecting sales growth of 4%on a weather-normalized basis. Our electric-service business earned$0.12 per share. Both businesses have realized the initial benefitsof our synergy-savings efforts.”

Rebecca Followill, a Houston-based Merrill Lynch analyst,observed LDC results are generally better than what had beenexpected. “I think there was some nice colder weather in March thatkind of saved a few people.”

“The first quarter of 1999 reflected colder weather conditionscompared to the record warmth experienced during the same period in1998, but still milder than the long-term average,” said BaltimoreGas &amp Electric’s Frank O. Heintz, executive vice president ofutility operations. “January through march of 1999 showed anincrease in heating degree days of more than 18% over last year’sfirst quarter, helping to boost sales of both electricity and gas.”

Followill also said losses from non-regulated businesses seem tobe tapering off, noting about a year ago many LDCs were justgetting into non-regulated enterprises, such as marketing.

“Our unregulated operations, as a group, are increasing theirmarket penetration and improving their financial performance,”noted Sempra Energy CEO Richard D. Farman. At Sempra, non-utilityand new-business operations recorded net income of $4 million,compared to a loss of $8 million in the first quarter of 1998. “Theimprovement in results for this group of companies was dueprimarily to the profitability of Sempra Energy Trading, whichincurred losses in the first quarter of 1998.”

“PSEG’s overall results demonstrated the benefits of a diversebusiness profile,” said Public Service Enterprise Group CEO E.James Ferland. “In the first quarter of 1998, when weather was verymild, [Public Service Electric &amp Gas’] gas and electric salesfor heating purposes were not especially strong. But, PSEGResources’ investments yielded unusually high income during thesame period, which mitigated the impact of the weather onPSE&ampG.”

Followill said, “For most of these companies, weather was stillwarmer than normal, which leaves some room for [improvement] nextyear, which is always nice to have.”

An improvement in LDC performance that bolsters stock priceswould be nice to have indeed in Phil Borish’s view. Borish is thesenior financial analyst for Rushmore Services’ American Gas IndexFund. “We had an awful quarter. The worst in our history. Thecompanies that did the best in the last quarter in our fund, well,frankly, they’re not the LDCs.” The fund has stock holdings acrossthe gas industry, including pipelines and marketers. The LDCs amongthe fund’s top-10 performers were all involved in some kind oftakeover action, Borish said, noting Southwest Gas and PublicService of North Carolina.

Overall, Borish is bullish for LDC stock prices and earnings.”It’s the throughput that will increase their profits, theirshareholder values. And the only thing that hammered against thatis two years of warm weather. The chances of having a third year,as one analyst said, I think are pretty slim.”

Another influence on LDC earnings last quarter was oil prices,noted Edward Jones analyst Zach Wagner. “Oil prices were low forthe quarter, and that impacted LDCs because the LDCs interruptiblecustomers generally switched to oil.” Look for weather hedges tobecome more popular among LDCs, Wagner advised.

Atlanta Gas Light was one of the biggest losers among a group of37 LDCs reporting first quarter earnings. AGL’s net income was offa whopping 46% from the first quarter of 1998. PaineWebber notedthe significant drop was due mainly to a change in rate design thattook effect in July 1998 when the company unbundled.

Also affecting AGL was the exodus of gas supply customersfollowing the company’s unbundling. More customers than expectedswitched to gas marketers, which made for increased operations andmaintenance expenses. Since deregulation in July of last year, morethan 50% of AGL’s utility customers have switched to marketers.

On the marketing front, AGL was hit by continued losses from itsgas marketing joint venture with Sonat Inc. “While deregulationcreates new opportunities, it also increases competition,particularly on the retail marketing front,” PaineWebber wrote in aresearch note. “In the short- to intermediate-term, smallermarketers, like AGL, will be able to serve local markets and nichesprofitably, but longer-term margins may be squeezed due to theentry of larger mega-type marketing firms.”

Joe Fisher, Houston

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